Assume Mitsubishi Chemical is evaluating a proposal to purchase a new compressor that would cost $400,000 and have a salvage value of $40,000 in five years. Mitsubishi's cost of capital is 16%. It would provide annual operating cash savings of $45,000, as follows:

	Old Compressor	New Compressor
Salaries	$120,000	$150,000
Supplies	24,000	15,000
Utilities	46,000	30,000
Cleaning and maintenance	70,000	20,000
Total cash expenditures	$260,000	$215,000

If the new compressor is purchased, Mitsubishi will sell the old compressor for its current salvage value of $120,000. If the new compressor is not purchased, the old compressor will be disposed of in five years at a predicted scrap value of $12,000. The old compressor's present book value is $170,000. If kept, the old compressor will require repairs one year from now predicted to cost $150,000. Required a. Use the total cost approach to evaluate the alternatives of keeping the old compressor and purchasing the new compressor. Indicate which alternative is preferred. Hint: Use a negative sign to indicate a negative net present value. Net present value of operating costs of keeping old compressor: $Answer Net present value of purchasing and operating new compressor: $Answer Net savings of Answerkeeping old compressorpurchasing new compressor $Answer b. Use the differential cost approach to evaluate the desirability of purchasing the new compressor. Note: There may be slight differences between your answers in part a and part b due to rounding. Note: Round each of your answers below to the nearest whole dollar.

		Present Value
	Predicted	of
	Cash Inflows (Outflows)	Cash Flows
Initial investment, net:	Answer	Answer
Operations	Answer	Answer
Repairs on old	Answer	Answer
Disinvestment	Answer	Answer
Net present value of costs		Answer

Net savings of (keeping old compressor or purchasing new compressor) $Answer